How does the key rate affect inflation?
The Central Bank's key rate is the main tool for regulating inflation. It affects the cost of loans, savings, and spending in the economy, which helps either speed up or slow down price growth. Let's take a closer look at how it works.
1. Raising the key rate and inflation
When the Central Bank raises the key rate, loans for banks become more expensive, and they, in turn, increase interest rates for businesses and households. This leads to several consequences:
Decreased consumer demand: Higher rates make loans, including mortgages and consumer loans, less affordable. As a result, people spend less, and demand for goods and services decreases.
Increased savings: When interest rates are high, deposits and savings become more attractive because they bring in more income. This encourages people to save more and spend less, which reduces pressure on prices.
Reduced investment: For businesses, more expensive loans mean higher investment and development costs, so companies may postpone expansion or reduce production, which also reduces overall demand in the economy.
As a result of all these factors, inflation may slow down. The central bank usually raises the key rate if inflation is out of control in order to “cool” the economy and stabilize prices.
2. Lowering the key rate and inflation
When the central bank lowers the key rate, the opposite happens:
Increase in consumer demand: loans become cheaper, which encourages people to borrow to buy things. This increases spending, increases demand for goods and services, which can accelerate inflation.
Reduce the attractiveness of savings: low interest rates on deposits reduce the return on savings, which motivates people to save less and spend more, supporting consumption.
Increase in investment: it is cheaper for businesses to borrow to invest in expansion, production, and new projects. This stimulates economic activity and creates more jobs, which also increases demand and can lead to higher prices.
A key rate cut is often used when the economy is slowing down and support is needed to stimulate consumption and investment. However, with a low rate, increased demand can lead to higher inflation.
3. Balance between inflation and economic growth
The Central Bank strives to maintain a balance between economic growth and inflation control. If inflation is too high, it weakens people's purchasing power. If the rate is too low, there is a risk of overheating the economy and accelerating inflation. By managing the key rate, the Central Bank tries to stabilize prices, maintain a stable level of inflation and simultaneously stimulate economic growth.
Personal view on the role of the key rate
As the founder of Open Oil Market, I understand that fluctuations in the key rate can significantly affect economic stability and business development. For example, when the rate increases, financing costs increase, which can reduce the volume of purchases and investment in expansion. For companies like ours, maintaining a reasonable level of inflation through competent management of the Central Bank's key rate plays a key role in creating stable conditions for growth and financial planning.
The Central Bank's key rate is the main tool for managing inflation. Raising the rate "cools" the economy and reduces inflation, while lowering the rate stimulates economic activity but can contribute to price growth.
What factors influence the Central Bank's key rate?
What is the Central Bank's key rate, in simple terms?
